Banking, finance, and taxes

Why Warren Buffett Keeps Adding to His Massive Bank of America Stake

Jon C. Ogg

Published: July 28, 2020 11:03 am

Bank of America Corp. (NYSE: BAC) has been among the banks noting worse credit metrics during the recession. In the current economy, just about every bank has been losing ground from how their metrics looked in 2019. One thing that Bank of America has going for it as a major endorsement is Warren Buffett, and his endorsement just became even larger.

A fresh filing with the U.S. Securities and Exchange Commission showed that Berkshire Hathaway Inc. (NYSE: BRK-B) has purchased an extra 16,424,366 shares of the common stock. The purchases were made from July 23 to July 27 with average block prices of $24.07, $24.35 and $24.36 (rounded) with a volume-weighted average price of about $24.22.

The new purchase price came to more than $397.8 million and adds to the 925,008,600 Bank of America common shares that Berkshire Hathaway owned as of March 31, 2020. That stake was already at 10.66% at that time, and it was the largest single stake held, with Vanguard (7.27%), BlackRock (6.25%) and State Street (4.00%) as the next largest stakeholders.

The news of share purchases on Tuesday is actually an even larger stake than had been the case at the end of March. Just a week earlier, there was news of more than 33.9 million shares purchased by Berkshire Hathaway. That puts the combined stake now up at just over 998 million shares. With Bank of America shares trading at $24.15, the current market value is worth more than $24.1 billion.

One interesting issue is that Bank of America came through its last earnings report mostly whole, and so far it does not seem that the bank is facing a major risk that it will have to make any drastic decisions about its shareholder capital return plans (i.e., dividends and buybacks). That is also with its shares down handily from its pre-pandemic highs.

Berkshire Hathaway has been a long-term holder of Bank of America, in a transaction that went back to the years after the Great Recession of a decade earlier. Unlike other bank holdings, Buffett decided to build up this position gradually rather than knocking it lower.

The most recent earnings report from Bank of America was not a blowup, but it was not a major victory either. Its shares have been hugging the $24 stock handle almost every day since July 10, but the stock had recovered to as much as $28 and $29 for a very brief period, when the rally was so strong in the first half of June.

Analysts are expecting a serious earnings contraction in 2020 ($1.58 per share versus $2.75 per share from 2019) and are looking for earnings to improve to $2.11 per share in 2021. There may be some changes to expectations. How the elections go in November could greatly alter regulations again, and there is also, of course, the issue of low interest rates hurting the earnings and interest margins based on customer deposits.

Buffett has been a vocal shareholder for looking long term rather than short term, and he had been marginally criticized for not deploying more of the $130 billion-plus when stock prices were so low in March.

With earnings behind it, Bank of America’s current $24.15 share price is within a 52-week range of $17.95 to $35.72 and compares to the Refinitiv consensus analyst target price of $28.53.

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